Mac and rice

By Chen Dujuan Source:Global Times Published: 2012-11-22 18:20:05

A staff member serves customers at a McDonald's in Beijing. Photo: Li Hao/GT

An Egg McMuffin and coffee is a normal breakfast for Lin Lei, a Beijing resident, as the 7-yuan set breakfast at the McDonald's near her home is clean, easy to take away and costs an acceptable price. And now, instead of coffee she can also choose soybean milk.

The traditional Chinese beverage is a new offering at McDonald's, and a nice option for Lin, as she has a "Chinese stomach."

McDonald's China told the media earlier this month that it would be launching more new products to appeal to the local market.

Analysts believe the US fast-food giant is aiming to speed up its localization in order to catch up with KFC, its arch rival in China.

Local options

Until now, McDonald's has not been that active in producing localized menus. Although it launched its first non-hamburger localized food item, a Triangle Wrap, for the Chinese market in 2004, the item did not stay on its core menu for long.

In an interview with CNBC two years ago, McDonald's China CEO Kenneth Chan explained the company's strategy, "If you offer too (many) local options, everyone else down the street offers the same products and they can probably serve it better and at a cheaper price than you can."

But it seems McDonald's is aiming to offer a bit more in terms of local flavor these days. The company told the Global Times in an e-mail Monday that it has also started offering soya milk as well as chicken wings cooked in a Chinese style. However, the company said it will still stick mainly to its global core menu.

By contrast, KFC has gone much further in offering localized food in China since 2002. The chain offers products including congee, soybean milk and fried dough sticks, as well as various rice combos.

These more localized items have helped to earn huge profits in China for KFC's parent company, Yum! Brands Inc. Yum's sales in China totaled $2 billion in the third quarter of 2012, accounting for 56 percent of the group's total, and sales in China grew by 22 percent year-on-year, much faster than the global rate of 6 percent, according to Yum's quarterly report released in October.

It is a trend for multinational fast-food companies to provide localized food, Kang Jianhua, a researcher at CIC Industry Research Center, told the Global Times on November 13.

Localization can help companies win local consumers' trust, which helps in building market share and also higher profit margins, Kang said.

Fast expansion

KFC's localized food is one reason why the company has been able to expand so quickly in China.

Although KFC has only half the number of outlets worldwide that McDonald's has, in China it's the other way round. KFC opened its 300th Beijing restaurant in August and its 4,000th outlet nationwide in Dalian, Liaoning Province in late September.

McDonald's told the Global Times that it has just over 1,600 restaurants nationwide.

Zhu Zongyi, president of Yum China, said that KFC will speed up its expansion in China by opening more than 500 outlets each year, with a concentration on the untapped fourth- and fifth-tier cities and towns.

Yum partnered with home appliance retailer Suning in May, with a plan to open 150 restaurants in Suning's shopping malls over the next five years. It also struck a deal with Chinese oil firm Sinopec last November to open 50 outlets in gas stations and expressway service stations in the next five years.

Chan from McDonald's told Fortune magazine in May that "we are not looking to be the largest in terms of the number of outlets, but we want to (offer) the best quality and best service."

The company hopes to distinguish itself from rivals by becoming a fashionable fast-food chain. The firm said it will give 80 percent of its restaurants in China an image makeover by the end of 2013, in a bid to appeal to young people.

McDonald's is also trying to maintain its pace of expansion in China. The country became its third largest market after the US and Japan in January, and it opened 200 new ones in 2011.

Chan said his company would increase its investment in China by 50 percent in 2012 to open up to 250 restaurants, 40 percent of which will be drive-throughs.

Other fast-food chains are also eyeing the huge market in China. Pizza Hut, also owned by Yum, opened its 600th restaurant in China in February and planned to open 150 more in 2012. Subway had 333 restaurants in China by September and planned to increase the number of outlets to 900 restaurants by 2015. Burger King aims to open 1,000 more restaurants in five to seven years.

Possible problems

The profit growth of China's catering industry fell to 13.1 percent during the first half of 2012, the lowest growth rate in nine years, due to rising costs of raw materials and labor, the China Cuisine Association said in August.

The two fast-food giants have also been affected. October sales at McDonald's restaurants fell by 2.4 percent year-on-year in the Asia/Pacific, Middle East and Africa regions and Yum China also saw a 4.1 percent decline year-on-year in its profit margin in the second quarter, according to their earnings reports. The two giants have also raised prices in China several times to offset the rising costs.

Many restaurants have closed down amid the economic downturn and rising costs, but now is a good time for cheaper fast-food chains to open more outlets, as that can increase total profits even if the profit margin for each outlet falls, Wang Danqing, a partner with Adfaith Consulting, told the Global Times on November 14.

However, expansion also brings risks such as cash flow pressure, management difficulties and possible loss of market share if the price rises are not accepted by normal customers, Dai Qiaoling, executive director with consulting firm Frost & Sullivan, told the Global Times.

A consumer surnamed Ye turned 42 ice-cream cones upside down at a KFC restaurant in Guiyang, Guizhou Province on November 12, out of anger at having to spend so long queuing. Another consumer bought 22 buckets to put in front of a KFC store in Wuhan, Hubei Province to protest against unsanitary operations at the restaurant.

McDonald's was also reported by CCTV in its March 15 Gala to be selling expired food at a Beijing restaurant.

Slack management and lack of training in some restaurants is a possible reason for the negative news, but excessively rapid expansion may be another reason, Dai said.

The fast-food chains need to find a balance between fast expansion and quality control, said Wang.